A Commentary on the Contradictions within the New VAT Refund Directive No. 1132/2026
The Value Added Tax Proclamation has once again given rise to a controversial directive, this time on VAT refunds. The Ministry of Revenue has already caused a stir with its previous VAT registration directive, prompting members of the legal community to challenge the authority over its application to lawyers. The new VAT refund directive also appears to contain its own contradictions.
The directive begins by stating the noble purpose of VAT refund services based on risk levels, which may be considered an efficient, fair and internationally aligned approach to tax refunds. VAT Refund Directive No. 1132/2026 introduces a more nuanced risk-based framework aimed at tightening control over fraudulent claims and improving efficiency.
However, not far removed from the controversy surrounding the VAT registration directive, an overview of Tax Refund Directive No. 1132/2026 reveals structural contradictions that could undermine its stated goals of efficiency and fairness. The new VAT refund directive has come a long way from its predecessor, VAT Refund Directive No. 164/2021, with technical advances and specialized risk-based refund assessment.
This short commentary examines three major contradictions within Directive No. 1132/2026 that may reduce its intended purpose and considers the way forward.
1. A retained interest-free loan to the tax authority at the cost of business expansion
In one of its more progressive approaches to safeguarding government revenue from fraudulent claims, Articles 4(4) and 13(2) of the directive acknowledge the high costs companies incur while expanding their businesses and operations through the construction of new buildings, factories or warehouses. Therefore, the directive allows such businesses to refund their VAT costs during construction. This appears to be a significant measure in support of business expansion.
However, these rights do not come easily for business owners, and this is the first paradox discussed under the directive. Although this restriction is not entirely new and appears in the previous VAT refund directive, its retention under the new framework remains a persistent problem.
The barrier to this right is that, even if a company is operational while expanding, it cannot use the VAT spent on new construction to reduce the monthly tax bills of its existing operations. Article 13(3) introduces a critical timing condition by effectively deferring refunds linked to construction and capital investment until the project is completed and operational readiness is verified.
This sequencing creates a gap between economic activity and fiscal recovery. Businesses continue to operate and pay taxes on existing activities, while VAT tied to expansion remains outside their liquidity cycle until project completion is confirmed.
This effectively gives the government what amounts to an interest-free loan by delaying the refund and locking away cash flow that should be available to the business until the building or construction project is open for business.
2. A statutory remedy transformed into an unnecessary litigation path
Perhaps the most contentious feature of the new directive, similar to the VAT registration directive, is its expansion of the tax authority’s mandate. It may be recalled that legal professionals challenged the constitutionality of extending the tax authority’s mandate under the VAT registration directive contrary to the VAT Proclamation. The core argument was that a directive cannot impose additional requirements forcing lawyers and other professionals to register for VAT and keep accounts for VAT irrespective of the proclamation, which requires registration only when income exceeds the two-million-birr threshold.
While there is an ongoing tax dispute between lawyers and the tax authority, the administrative body appears to be doubling down on the argument for expanding its mandate beyond the parent law, in this case the VAT Proclamation.
To put this into perspective, the VAT Proclamation, under Article 50, explicitly mandates that if the tax authority fails to pay a refund within the required period, it shall pay interest on the VAT refund owed to the business. This provision is intended as a safeguard against administrative delay.
However, under the new VAT refund directive, this self-executing statutory right to interest on delayed VAT refunds becomes conditional through the introduction of new requirements under Article 14(3) of the directive. The directive states that the tax authority shall pay the interest only after the business obtains a court judgment and submits the claim within six months of the ruling, failing which the claim is deemed waived.
This introduces a procedural threshold that is not explicitly present in the VAT Proclamation. It effectively transforms what appears to be a statutory remedy under the proclamation into a litigation-dependent claim, thereby shifting the burden to the taxpayer and narrowing rights clearly granted under the parent law.
3. The double standard of enforcement delay
Although nobody welcomes late payments owed to them, comparing taxpayer delays with state delays reveals the asymmetry of administrative justice under the tax administration system.
The Tax Administration Proclamation No. 983/2016 subjects late taxpayers to immediate enforcement measures without a court order, including seizure of assets and swift freezing or deduction from bank accounts. By contrast, the double standard reflected in the new directive shields the state behind a wall of litigation, requiring businesses to spend money on legal fees to recover what is legally their own.
This shows that the government uses its administrative power when taxpayers delay their obligations, but imposes an unnecessary judicial burden on businesses when the government itself delays. When taxpayers delay, enforcement is swift and administrative. When the state delays this potentially owed revenue, recovery becomes slower, conditional and litigation-driven. This double standard creates an uneven framework for liability in late payments while disregarding what is at stake for businesses.
Overall, the introduction of VAT Refund Directive No. 1132/2026 can be seen as a positive development toward establishing a risk-based tax refund assessment system to deter malicious claims. The directive represents a shift toward more structured and risk-sensitive VAT refund administration.
However, its potential is limited by internal contradictions, including the unfair freezing of refund amounts during construction, the requirement for taxpayers to go to court to claim interest on late refunds and the expansion of the directive beyond the statutory rights set out in the VAT Proclamation.
In effect, these contradictions place the cost of bureaucratic inefficiency on the private sector through frozen liquidity, litigation burdens and delayed recovery of funds legally owed to businesses. Therefore, the way forward is to align the directive with the parent VAT Proclamation, avoid constitutional disputes, remove unnecessary litigation requirements and ensure a transparent refund system that does not undermine business cash flow through prolonged VAT refund delays.
